I had two interesting conversation yesterday. The first informed me that £200 had been paid for conventional "new crop" wheat. This is not entirely surprising given the strength the conventional market has shown in recent times but is does raise the interesting question for the organic sector. How much premium can the organic sector pay for organic grain?
I then spoke to someone involved in the dairy industry and speculated that organic grain would continue to remain high and that, given the conventional price, organic wheat was likely to remain over £250 per tonne. To this I was given a very straight response that no dairy farmer would or could afford to pay that without a significant rise in the milk price which did not seem likely. I was then told that roughly 1 organic dairy farmer per week is leaving the industry. They are either retiring or decertifying and producing conventional milk (although some are keeping their land organic). If this loss of dairy farmers is extrapolated could mean the dairy sector would require 15000 tonnes less organic grain next year.
Given these pieces of information the question for organic cereal farmers is "How low can your premium go?" and "What level of organic premium do you require to stay organic?" Cereal prices above £200 make organic grain production profitable but there is an "opportunity cost" to remaining organic if one could make more money as a conventional farmer. However, if you are profitable any decision becomes one of attitude and the longer term view taken by the farmer.
For most farmers organic systems are slightly more profitable than conventional ones. An organic farmer takes more risk (in terms of yield and market) but is better rewarded for taking this risk. Attitude and technical concerns have held back greater arable conversion rather than financial considerations. Currently this is open to challenge as conventional arable farming seemingly provides a better return.
However, perhaps this new assertion should be put into a broader perspective. Firstly, input prices always rise as conventional farmgate prices rise, thus reducing profitability. Secondly, diffuse pollution form agriculture will remain a significant policy driver and a profitable farming industry is more ripe for "polluter pays" type legislation than one that is unprofitable. This could also result in additional costs being levied against the conventional producer.
Finally, I have recently heard of approximately 1800 tonnes of organic cereal production being de-registered. It is difficult to extrapolate what this might be across the whole sector but if others are getting out and reducing the supply of organic cereals at a time when provenance is becoming a stronger driver in the market perhaps there are opportunities for margins over the conventional market to be maintained. The old adage to do what everyone else isn't may once again prove true. These are interesting times whichever market you are in and will continue to remain so for the foreseeable future.
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Tuesday 25 January 2011
15% of US households re now "food insecure"
15% of US households are now "food insecure" which means that every month they will be forced to miss meals or seek assistance to feed themselves. This is a shocking indictment of a developed economy but a comment too upon the misguided approach to food and nutrition we see in developed economies. As food prices increase feed through the supply chain to consumers this situation can only get worse.
"a speculative bet that a greater fool will one day buy from you at a higher price"
One hedge fund reported having made £71 million on the grain market since the beginning of 2011. This is a fascinating commentary on the commodity market and the seeming enthusiasm there is to "invest" in this market.
Perhaps we need to see "investment" capital leave this market so we can see a return to a market driven by the fundamentals that drive the market rather than a high stakes playground.
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